Other Transaction Cycles: Fixed Assets, Payroll & Financing Audits Simplified
Overview: While many audit engagements focus on revenue and cash cycles, properly testing PP&E, payroll, and financing cycles is equally vital. This guide breaks down key controls, audit evidence, and reporting for each.
✅ Property, Plant, & Equipment (PP&E) Cycle
- Controls: Capital asset purchases must be authorized by top management and compared to the capital budget. Serial numbers, ID plates, and periodic physical inspection safeguard assets. Detailed subsidiary ledgers track each item.
- Audit Procedures: Foot fixed asset schedules, agree to GL, test additions/disposals, verify depreciation calculations, and test for impairment. Vouch assets to physical existence, and check deeds or titles for ownership.
- Watch For: Items in repairs/maintenance that should be capitalized, improper classification of finance vs. operating leases, and unrecorded retirements.
✅ Payroll & Personnel Cycle
- Biggest Risks: Fictitious employees, falsified hours. Service organizations are common for payroll processing, but their controls become part of your audit scope.
- Controls: Segregate HR hiring, supervisor approvals for time, independent payroll check prep and distribution. Use paymaster if checks are manual; require ID for pickup.
- Audit Procedures: Observe payroll distribution, perform surprise checks, compare personnel files to payroll files. Recalculate payroll accruals and test time cards for completeness, cutoff, valuation, and existence.
- Disclosures: Pension, stock comp, deferred comp, and restrictions on retained earnings must be disclosed accurately.
✅ Financing Cycle: Debt & Equity
- Debt: Board must authorize new borrowings. Confirm notes/bonds with creditors. Recompute interest and amortization of premiums or discounts. Check for off-BS financing.
- Equity: Use stock transfer agents if possible. Otherwise, reconcile stock certificate books to GL, confirm treasury stock, and review board minutes for issuances, dividends, or treasury stock transactions.
- Disclosures: Maturity dates, interest rates, covenants for debt; number of shares, rights and privileges, stock options, and dividend restrictions for equity.
✅ Practical Tips
- Dual-purpose tests are efficient: link TOC and substantive tests when possible.
- Trace from source docs to ledgers (completeness) and from ledgers back to docs (existence).
- Always match disclosures with other evidence for consistency.
🔗 Helpful References
👉 Get PP&E, payroll, and financing cycles right — every time you audit!
